7/7/09 (Great Fed Debate, Europe Rebounds!)

Traders,

Sorry about not being around Monday, the Dentist morning visit (routine) kept me at bay. Thursday before the holiday weekend so extreme pressure going into the holiday and it looked like Monday was going to follow through, but going into the close we saw a significant rebound. We are at some support levels and need to pay close attention to see if they hold or if we continue to slide.

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The Great Fed debate creates dollar volatility

The debate about how and if the Fed can reverse course on their “Quantitative Easing” strategy has been heating up. This is not just China and Russia concerned, but it is ramping between investment banks. Goldman Sach’s doesn’t seem to be concerned and believe the Fed has time to deploy proper exit strategies to avoid inflation risk, which Morgan Stanley remains concern that the Fed may keep easing credit too long that it would encumber a proper exit strategy that would avoid inflation. It is not who is right or who is wrong that we will be able to discern from this debate, but rather that the debate is even happening.
Certainly these are unprecedented times and loose comparisons are being made to the Great Depression (if comparisons are even appropriate) – that being said no one seems to know what is in store and the more debate means the greater the unknown. All that equates to more volatility. We are seeing that already in the currency market – the dollar was weakening as foreign central banks pointed fingers about the U.S. increased national debt have investors running for safe havens outside the dollar. Renewed optimism and hope have them rushing back in and out of other currencies. Everyone is trying to make a bet as to where the safe heaven is and which side they want to be on.
This means that hedging all positions against adverse market moves (either up or down) is prudent, additionally diversifying holding out of dollar backed risk would also help secure buying power if inflation does come. I am certainly in the camp that inflation is coming – the question is when and how much. For me it is certain.
Interesting article at Bloomberg spells out the concern: http://www.bloomberg.com/apps/news?pid=20601087&sid=aXE_NxcOLRXc
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Europe stock rebound – does it follow through to the U.S.

After the sell off on Thursday (globally) and a mixed to negative market yesterday, Europe saw a rebound as manufacturing orders seem to pick up. Obama is meeting with Russia and no doubt there has been tensions with the ex-Eastern Bloc community. Russia (like China) have been quick to voice their reserve currency concerns, have moved to purchase IMF debt, additionally they have relations with nations (trade mostly) that is in direct conflict with U.S. allies. Of course there is the old debate over nukes – but the real issues on the table in economics.
Europe is in mixed shape compared to the United States. Some nations have stronger manufacturing and services and less debt, while others are struggling. Sharing a common currency does help the weaker ones, but it drags on the stronger nations. Europe has also been making end roads into Russia and China – as corporations look to penetrate those markets from both a consumer and manufacturing standpoint. They are also less critical to voice their differences – as the U.S. has a history of voicing their political and economic concerns. Which has created stressful relationships – most recently accusing China of currency manipulation.
The question is not looking at a global recovery, but which nations recover and which nations struggle. China (and the BRIC) for the most part have the ability to recover quicker because of their low debt, while the U.S. struggles with increased debt. Europe is on the fence and what ties them together is the Euro. Germany has made great roads to be the leader of the European community from being a financial center, manufacturing, durable goods, and trade.
So – as we see a rebound in Europe, does that carry through to the U.S. equity markets? It will be interesting – certainly there are companies that do prosper internationally, but I think that may not be enough to carry the nation as a whole.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aVh1u69q0qgc

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Future Pre-market

The futures are looking a flat to mix a little volatility has entered the pre-market. The ARB traders are side-line because there is little if any spreads. Expect a mix opening unless something changes.

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Support / Resistance

Getting close to those support levels.

INDU 8250 / 8500 (We are 75 points above it after a rally going into the close. Do we retest and hold or rally out of here?)

NDX 1400-1425 / 1475-1500 (The short-term support is that 1425 line, sure we could slip to 1400 if we head lower. But keeping above the 1425 area is sign of rebound.)

SPX 900! (Sure we closed slightly below it and a visit to the 880 area is not out of the question. Closing above 900 is critical to see a rebound.)

RUT 500! (Similar to the SPX the RUT needs to close above the 500 level, it was just below it yesterday. Watch the close.)

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Gold 900+ (Gold has gotten quite and is sitting around the 930 to 950 area – it seems to be waiting.)

Silver 13+ (We saw it fall of from the 14s but it like gold seems to be in a staging area.)

It would seem the metals are seeing slight volatility as the inflation debate rages.

OIL 60+ (Oil slipped from the 70 level to the mid 60s. This is a serious mix bag of dollar (inflation), inventory levels, and assumption that the U.S. consumer can afford higher gas prices or will drive less. Expect volatility)

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Conclusion

There is talk about another stimulus check http://www.bloomberg.com/apps/news?pid=20601087&sid=aStWHJXsvePA , a debate rages even among firms about inflation risk, Obama is meeting with Russia and economic concerns about a new reserve currency is certainly on the agenda. These “Green Shoots” are not bearing fruit and it looks like a recovery may be further off. Talk is also surfacing that we might NOT have seen a bottom yet.
Certainly volatility is revisiting the market and the VIX is again flirting with 30.

Get your hedge on.